No 14A Disallowance if Dividend Received on Stock-in-Trade

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The assessee a dealer in shares and securities earned dividend income from shares. The assessee claimed expenditure on brokerage of arranging interest free loan which was for payment of conversion cost of its stock of partly paid shares into fully paid shares.
The Assessing Officer disallowed this amount on the ground that it was spent for earning exempt income. On appeal, while the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal restricted disallowance to the extent related to earning of dividend income as the loan had been utilized for the purchase of shares and the profit earned by sale of those shares was offered as business income. The Tribunal, therefore, directed the Assessing Officer to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.
Before the High Court, the assessee contended that it had incurred expenditure for purchasing shares. 63 per cent of the shares so purchased were sold and the income derived there from was offered to tax as business income and the remaining 37 per cent of shares remained unsold and yielded dividend and, therefore, no expenditure could be attributed to the said dividend income.


The issue before in CCI vs JCIT,Udupi Range [2012] 20 taxmann.com 196 (Kar.) was

Whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation?

Hon’ble held vide its order 2/28/2012 as under :

When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside